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Corporate paralysis: winding up on the “just and equitable ground”

A company is able to act through its two decision-making organs: the board of directors or the members acting in a general meeting. As I discussed in my last blog, in cases where there are no directors, it has been held that there is a residual common law power for members in a general meeting to appoint directors (thus enabling the board to act).

In CIC Insurance Ltd (prov Liq appointed) v Hannan & Co Pty Ltd (2001) 38 ACSR 245, Barrett J of the New South Wales Supreme Court found that, in circumstances where the directors of the company had resigned and the financial circumstances of the company were such that the sole shareholder could not find any persons willing to act as directors, it was appropriate for the company to be wound up on the “just and equitable ground” pursuant to section 461(1)(k) of the Corporations Act 2001 (Cth).

In that case, Barrett J found that a “power vacuum” at board level (i.e. where directors are unable or unwilling to act) is probably not sufficient to justify winding up on the just and equitable ground, since it is always open to the members to appoint directors who can function the board. Referring to Re Vision Image (Aust) Pty Ltd; Cheng v Yeo [1998] WASC 38, Barrett J held that there must be some additional element of “corporate paralysis” such as an absence of any prospect of the company continuing to operate. In CIC Insurance, such an additional element was evident from the practical reality that no one could be found to accept an appointment to the board, coupled with the express wish for the sole shareholder that liquidators be appointed.

CIC Insurance has been subsequently considered in Great Australian Resources Pty Ltd v Platinum Mining Ventures Ltd [20011] FCA 1472. In that case, Barker J of the Federal Court of Australia found that the additional requirement could be satisfied where there is an absence of directors and it is unlikely that new directors will be appointed. Barker J found that an order for the company to be wound up on the “just and equitable ground” was appropriate given that, practically, the company was in an advanced state of corporate paralysis, if not totally lifeless.

If a company is in a position of corporate paralysis where there are no directors and it is unlikely that new directors will be appointed, it is very important that other persons within that company do not take steps to cause it to act. If they do so, they can be considered de facto directors and could be exposed to the potential liabilities that are associated with that position. This is particularly important for companies where there is also and element of financial distress (or actual insolvency) as there is a risk that that person may be in contravention of section 588G of the Corporations Act 2001 in respect of a directors duty to prevent insolvent trading.

Where a company has no directors and no one willing to accept an appointment, the prospect of that company’s continual operations should be assessed. Where there is an absence of any prospect of the company continuing to operate, steps should be quickly taken for the company to be wound up on the grounds that it is just and equitable to do so.